Portfolio Analysis

Submitted by Michael Rastall 18th November 2013 15:32


Key Messages

  • There is increasing interest in the appraisal of options, as adaptation moves from theory to practice. In response, a number of existing and new decision support tools are being considered, including methods that address uncertainty.

  • The FP7 MEDIATION project has undertaken a detailed review of these tools, and has tested them in a series of case studies. It has assessed their applicability for adaptation and analysed how they consider uncertainty. The findings are including on the MEDIATION Adaptation Platform and summarised in a set of policy briefing notes.

  • One of the tools recommended for adaptation is Portfolio Analysis (PA).

  • PA is a tool that helps in the design and evaluation of portfolios, i.e. in selecting a set of options which (together) are effective over a range of possible future climates, rather than a single option best suited to one possible future.

  • The approach allows the identification of efficient portfolios, i.e. those that have the highest possible expected return for a given risk, or the lowest degree of risk for a given rate of return. This then provides the investor or decision maker with a choice of alternative (efficient) portfolios, which they can choose from based on their risk-return preferences.

  • The approach has considerable potential for addressing climate change uncertainty, through the use of portfolios of options rather than single solutions. It has a high resonance with the concepts of iterative risk management in its encouragement of diversification (a key part of risk management). The approach can be used within an economic analytical framework and can also assess portfolios in terms of non- monetary (physical) effectiveness.

  • The review has considered the strengths and weakness of the approach for adaptation. The main strength of portfolio analysis is that it provides a structured way of addressing (climate change) uncertainty through the identification of suitable combinations of options that – between them – reduce climate impacts over the range of impact uncertainty, expressing the effectiveness of alternative portfolios in quantitative terms.

  • This provides a way of managing uncertainty that the analysis of individual adaptation options does not allow. It can also assess benefits in economic or physical terms, allowing application in market and non-market sectors.

  • The potential disadvantages are that it is resource intensive, requires a high degree of expert knowledge, and relies on the availability of quantitative data. The approach also requires the use of probabilities, which can prove challenging for the application to climate change. The technique is obviously not relevant when one option addresses the full range of uncertainty in climate impacts.

  • Previous applications of PA for adaptation have been reviewed and a number of adaptation case studies are summarised which provide information on practical applications.

  • The review and case studies provide useful information on the types of adaptation problem types where PA might be appropriate, as well as data needs, resource requirements and good practice lessons.

  • PA is a key tool for helping to identify and analyse alternative portfolios of adaptation options. It has a clear application in cases where adaptation actions are likely to be complementary in reducing climate risks. 

Suggested Citation

Hunt, A, and Watkiss, P (2013). Portfolio Analysis: Decision Support Methods for Adaptation, MEDIATION Project, Briefing Note 5.

The research leading to these results has received funding from the European Community's Seventh Framework Programme (FP7/2007-2013) under grant agreement no. 244012.